2. Monetary policy is the process by which the monetary
authority of a country control the supply of money for the
purpose of promoting economic growth and stability.
In other words:
This policy is adopted by the central bank of an economy in
order to control & regulate the money supply in the country
as to stabilize the economy. The main function of monetary
policy is to control & regulate credit money.

3. There are two types of monetary policy:

4. Expansionary monetary policy is appropriate when the
economy is in recession and unemployment is a problem.
The goal of expansionary monetary policy is to reduce
unemployment. Therefore the tools would be an increase
in the money supply.
To increase the money supply the federal government can:
 Buy government bonds(open market purchase)
 Lower the interest rate
 Lower the reserve ratio

5. This would shift the AD curve to the right decreasing unemployment but it
may also cause some inflation. Change the money supply affect the
economy through a these process:
Money
supply rise
Interest rate
decline
Investment
level rise
Aggregate
demand rise
RealGDP
rise
Unemployment
decline Price rise
Inflation
rise

6. Contractionary monetary policy is appropriate when economy
is in expansion and inflation is a problem. The goal of
contractionary monetary policy is to reduce inflation.
Therefore the tool would be the decrease in the money
supply.
To decrease the money supply the federal reserve can:
 Sell government bonds(an open market sell)
 Raise the interest rate
 Raise the reserve ratio

7. This would shift the AD curve to the left decreasing inflation. But it
may also cause some unemployment. Change the money supply
affect the economy through these process:
Money
supply
decline
Interest rate
rise
Investment
level decline
Aggregate
demand
decline
RealGDP
decline
Unemployment
rise
Price
decline
Inflation
decline